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Ethics and Leadership News

March 31, 2004

Whole Foods Founder Offers New Business Paradigm

John Mackey, founder and CEO of Whole Foods Market addresses students.

Business has gotten a bad rap, according to John Mackey, founder and CEO of Whole Foods Market. Although the media routinely portrays business people as villains, Mackey noted that modern capitalism has dramatically raised living standards for much of the world’s population.

“Two hundred years ago, 95 percent of people in the world were poor. Today, 60 percent are poor,” Mackey told an amphitheater packed with Columbia Business School students on February 17. “Business has a fundamental responsibility to create prosperity for society and the world. It’s a holy calling.”

Mackey spoke at the invitation of Professor Mark Skousen, who teaches an elective course titled Free-Market Strategies for Managers, and the Eugene M. Lang Center for Entrepreneurship. On February 18, Mackey conducted a tour of the new Whole Foods Market at Columbus Circle—the largest supermarket in Manhattan—for Professor Skousen’s class and other interested Columbia Business School students.

While he believes that business is an inherently ethical enterprise, Mackey attributed the recent spate of corporate scandals to a flawed business paradigm. “These scandals are not aberrations,” he said. “I believe they are intrinsic to the business paradigm in our society.”

A college dropout who runs a $3.2 billion company, Mackey challenged MBA students to question the conventional business school wisdom that companies exist to maximize profits and shareholder value. “Every business should have a mission at its core that includes but goes beyond maximizing profits and shareholder value,” Mackey said. He proposed a new business paradigm that places customers ahead of shareholders.

“A business is a community of people working together to create value for other people—customers, team members, shareholders and communities,” he said. Noting that Adam Smith was the first to recognize that capitalism is based on a community of interests, Mackey acknowledged that his paradigm is not really new, but said the dominant business paradigm in America has become too focused on stock price.

The paradox of shareholder value, Mackey said, is that companies maximize it by not making it the primary goal. “If you want to maximize shareholder value, don’t aim for it. At least, don’t aim for it directly. Put the customer first, put employees second and you’ll maximize shareholder value.”

Mackey founded his first Whole Foods store in Austin, Tex., in 1980 with a $10,000 loan from his father. The first store failed, but Mackey tried again. By 1988 he had a thriving chain of five stores. Having exhausted the seed capital borrowed from family members and friends, he applied for venture capital to expand the business. “Venture capitalists are like hitchhikers with credit cards,” he said. “As long as you take them where they want to go, they’ll pay for the gas. If not, they take over the car and throw you out.”

The company went public in 1992. Since the IPO, its sales have grown at a compound annual rate of 34 percent and its stock price has grown at a compound annual rate of 24 percent. Whole Foods is now the largest retailer of natural and organic foods in the world, with 154 stores in 25 states, Canada and the UK.

After Wal-Mart, Whole Foods is the largest nonunionized food retailer in the United States. The company’s 28,000 employees are organized into self-managing teams. Most of them—87 percent—are full-time employees. In comparison, about 20 percent of employees in the industry as a whole are full-time employees. Mackey said the company’s emphasis on shared fate—“the idea that we’re all in this together”—removes the incentive for unionization.

“Labor unions create an adversarial relationship between workers and management,” Mackey said. “I’ve put forward a model that is cooperative.” He proudly points out that, for seven years in a row, his company has been on Fortune’s list of the 100 Best Companies to Work For.

“In a lot of ways the retail business could not be more simple,” Mackey said. “All you have to do is make sure the team members are happy. They make the customers happy, and the customers make the shareholders prosperous.”

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